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Dollar soars while gold and silver fall on recession fears

September 22, 2011 | 10:58
am

Buoyed by new recession fears, the soaring dollar trampled gold Thursday, pushing the spot price of the precious metal to its lowest point in more than a month.

A day after the Federal Reserve announced plans to swap $400 billion of short-term government debt for longer-maturity U.S. Treasury bonds, disappointed investors kicked the Dow Jones down more than 400 points.

“There’s a meltdown in stocks; the Fed came up short,” said Marin Aleksov, chief executive of precious metals broker Rosland Capital in Santa Monica. “People are scrambling to get cash to cover their position. It’s driven by emotions and uncertainty at this point.”

Added James Steel, chief commodities analyst for HSBC: “Normally, declines in equity markets would be good for gold. But there’s a twist to it today because the declines globally are so severe.”

Commodities slid as the dollar hit its highest point since February. Gold sank $66.40, or 3.7%, to around $1,740 an ounce after edging toward $2,000 last month. Palladium was around $656, its lowest level in nearly a year. Silver swung down more than 8%, to under $37 an ounce.

The ThomsonReuters/Jefferies CRB index of 19 major commodities was down 4.4% at midday, the biggest drop since May 5.

The Fed’s warning that there were “significant downside risks to the economic outlook” sparked more concerns. Especially for metals with industrial uses such as silver, platinum and palladium, a slowing economy signals less manufacturing demand to many investors.

Some analysts said the recent volatility in gold prices has some safety-minded investors reconsidering. And worries about sovereign debt in Europe have weakened the euro, in turn strengthening the dollar, which tends to have an inverse relationship with gold.

But many expect the metal, currently on an 11-year upward trend, to rebound.

“This doesn’t mean the gold rally’s over,” Steel said. “In a perverse sort of way, gold is showing why you buy it -- in case of an emergency to raise cash.”

The metal will also benefit from the still-deteriorating situation in Europe, analysts said.

“Worldwide, they’re going to keep bailing people out and at some point Europe is going to have their Lehman moment,” Aleksov said. “Vaults are overcrowded with gold -- people are going for safety.”